PwC
Agenda
IFRS 4 Phase I:key impacts
IFRS 4 Phase II:Measurementmodels
Transition anddisclosures
Financialreporting vsRegulatoryframework
Implications forinsurers
1 2
3 4
5 6
2November 2015
7 Appendix
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Almost a 20 year journey, so far…
Discussionpaper
published
May 2007
Commentperiod closed
Nov 2007
Phase IIexposure
draft
July 2010
Phase IIexposure
draft(revised)
June 2013
Phase IIIFRS
EffectiveDate of
Standard?
2015?2016?
Start ofinsurance
project
1997
1997 1999 2004 2007 2008 2009 2010 2013 2013-2016
Oct 2008
FASB DP
Sept 2010?
FASB DP
Sept 2010?
FASB joinsproject
Oct 2008
November 20153
Phase IIwork begun
Jul 2004
Issue Paper /DSOP
Dec 1999
2002
Project splitin two phases
2002
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Definition of an Insurance Contract
November 20155
“A contract under which one party (the insurer) accepts significantinsurance risk from another party (the policyholder) by agreeing to
compensate the policyholder if a specified uncertain future event (theinsured event) adversely affects the policyholder.”
• Insurance risk = other than financial risk
• Uncertainty: if, when or how much
• Same definition for reinsurance
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Key Impacts
November 20156
Classification determines measurement (three categories)
Insurance / ReinsuranceContracts
Investment ContractsInvestment contracts with
DPFInsurance Contracts
Local GAAP Local GAAP IAS 39
IFRS 4 permits use of existing accounting policies for insurance contracts(including non-uniform policies)
IFRS 4 permits accounting policy “improvements” so long as…. more relevantand no less reliable, or more reliable and no less relevant
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Key Impacts
November 20157
Changes introduced by IFRS 4
• ‘Insurance contract’ defined – determines if contract in IFRS 4 or IAS 39
• Equalisation provisions - eliminated
• Liability adequacy test – introduced and required
• Embedded derivatives – accounting in certain cases
• Discretionary participation feature - introduced
• Unbundling – introduced and required in certain cases
• No offsetting of reinsurance against related insurance - balance sheet and inP&L
• Reinsurance asset impairment testing - required
• Accounting policy improvements - introduced to assist insurers duringPhase I.
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Disclosures
November 20158
• Accounting policies
• Assumptions used in determining insurance liabilities
• Effect of changes in assumptions
• Management of Insurance risk (incl. financial risk, currency risk, credit risk)
• Movement in insurance liabilities and reinsurance assets
• Claims development tables
• Other
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Measurement models
Undiscountedreserves forpast claims(including
IBNR)
CurrentIFRS/GAAP
BBA throughout PAA PAA andundiscounted
incurred claims
Discounting
Risk adjustment
Best estimate offulfilment cash flows
Discounting
Risk adjustment
Best estimate offulfilment cash flows
Discounting
Risk adjustment
Best estimate offulfilment cash flows
Contractual ServiceMargin
UPR less DACPremium (less
acquisition costs)unearned
Premium (lessacquisition costs)
unearned
Ex
pir
ed
ris
kU
ne
xp
ire
dr
isk
Best estimate offulfilment cash flows
Risk adjustment
November 201510
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Default measurement model in IFRS 4 Phase IIOverview of building block approach ‘BBA’
• Default model for all insurancecontracts.
• Based on discounted bestestimate of future cash flows.
• Explicit margins:
- Contractual service marginto prevent gain on policyinception.
- Risk adjustment.
• Day 1 loss recognised in incomestatement.
• Cash flow approach for allliabilities: past claims(including IBNR) andfuture cover.
Unearned profits recognised overcoverage period.
Reflect compensation for uncertainty.Quantifies the value difference betweencertain and uncertain liability.
Discounting future cash flows using‘top-down’ or ‘bottom-up’ approach fordiscount rates to reflect characteristicsof the liabilities.
Best estimate cash flows – explicit,unbiased and probability weightedestimate of fulfilment cash flows.
Discounting
Risk adjustment
Contractual servicemargin
Best estimate offulfilment cash flows
Expired and unexpired risk
November 201511
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Optional model for short term contractsPremium Allocation Approach ‘PAA’
• Optional simplified model forfuture cover based on theunearned premium.
• Permitted for short durationcontracts (period of cover <= 1year) or where a ‘reasonableapproximation’ of BBA.
• ‘Reasonable approximation’does not apply when entityexpects significant variability incash flows – No furtherguidance on what this means.
• Incurred claims liability(including IBNR) calculatedin the same way as for theBBA approach.
Unexpired premiums lessacquisition costs
Discounting
Risk adjustment
Best estimate offulfilment cash flows*
Expired risk Unexpired risk
* Probability weighted,essentially a mean.
November 201512
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Optional model for very short tail contractsPAA and undiscounted liabilities
Unexpired premiums lessacquisition costs
Expired risk Unexpired risk
Risk adjustment
Undiscounted estimateof fulfilment cash flows
Avoids discounting entirelyfor very short-tail contracts
• PAA for unexpired risk.Incurred claim liabilities (inc.IBNR) are undiscounted.
• Permitted for short durationcontracts (period of cover <= 1year) or where a ‘reasonableapproximation’ of BBA, andclaim liability cash flows areexpected to be paid or receivedin one year or less.
13November 2015
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Transition
• Each portfolio measured using BBA with contractual service margin
• Difference between BBA and current carrying value reflected in openingretained earnings
• Retrospective application unless impracticable
• If impracticable, simplifications required for building blocks:
• Derecognise balances for deferred acquisition costs
15November 2015
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Disclosures
Amounts
• Detailed roll forward schedules andreconciliations
• Reconciliation of sources of profit• Contracts written in the period• Relationship interest and investment return
Significantjudgements
• Processes to estimate inputs to methods• Effect of changes in methods and inputs• Confidence level for determining risk
adjustment• Yield curve(s) used to discount cash flows
Nature and extentof risks
• Nature and extent of risks• Insurance risk on gross/net basis• Concentrations of insurance risk and claims
development• Quantitative disclosures on non-insurance risks
16November 2015
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Financial reporting vs Regulatory framework
• Financial reporting and regulatory reporting under IFRS in Lebanon(impacted by local laws and Decrees for measurement of insuranceliabilities)
• No separate regulatory framework (ie Solvency II or equivalent)
• IFRS 4 Phase II: introduction of major changes to the measurementof insurance contracts and significant impact on financial statements
• Current regulatory framework not aligned to IFRS 4 Phase II
• Requirement to introduce a new regulatory framework (equivalent toSolvency II as mostly aligned to IFRS 4 Phase II)
• Significant implications on local insurance market and little time left
18November 2015
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Implications
• Impact on financial statements will vary for entities depending onnature of contracts and current local GAAP
• Likelihood of increased volatility since measurements reflect currentestimates
• Profit recognition on transition for existing contracts
• Measuring and communicating business performance
• Practical implementation issues (e.g. definition of cash flows,discount rate, risk margin, scope of stochastic modelling)
• Need for new systems and data and related staff training
November 201520
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